The Information Gap
Introduction
The law against insider trading has traditionally cut one way: when a person possesses material nonpublic information, they cannot use that information to trade in the securities markets and profit.
But what if something goes wrong, and the insider does not trade the stock that the confidential information concerns? This is the issue in SEC v. Panuwat, a case currently making its way through the U.S. Court of Appeals for the Ninth Circuit. The Securities and Exchange Commission alleges that former Medivation employee Matthew Panuwat learned of Pfizer's plans to acquire his company and, shortly thereafter, purchased short-term call options in a different biotechnology company, Incyte.¹
Panuwat did not trade Medivation securities; rather, he allegedly used his position to acquire information that proved useful in generating a profit from a separate company. The SEC's allegations have generated a new issue in insider-trading law: whether a person can be liable for insider trading when they use confidential information to trade in a security different from the one concerning which the information was gathered.
The Traditional Model
There is no single easily understood statute that covers all aspects of insider-trading law. In general, section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 implement a general prohibition against "deceitful" conduct in connection with trades of securities.²
The Supreme Court has interpreted this to include a general prohibition against persons who possess material nonpublic information trading in the securities of the company that provided the information or a company in the same industry.
The classical theory holds that corporate insiders who owe a duty of loyalty to shareholders may violate the securities laws by trading in the securities of the company that employed them when they possess material nonpublic information. The misappropriation theory is slightly different: a person may also commit insider trading when they secretly use confidential information that they acquired from a third party to trade in securities for personal gain. The Supreme Court affirmed the latter theory in United States v. O'Hagan (1997).⁴ What unites these two theories is that both focus on the role of information and the duty of a person who possesses it. However, it is entirely possible for a person to possess material nonpublic information and not trade in the securities of the company that issued it. Hence the novelty of the SEC's case against Panuwat.
The Shadow Trade
According to the SEC's complaint, Panuwat was the head of business development at Medivation. In August 2016, he learned that Pfizer was set to acquire Medivation. Just seven minutes after receiving an email with information about the impending deal, Panuwat bought short-term call options in Incyte, a different biotechnology company.¹
The SEC alleges that the imminent acquisition of Medivation was likely to drive up the prices of similar biotechnology companies.
Thus, the value of Incyte's securities was also set to rise. It turned out the SEC was right - the market moved in the direction the SEC expected, and Panuwat was able to profit.
The key detail that differentiates this case from the classic insider-trading scam is that Panuwat used Medivation's confidential information to trade in Incyte's securities. Where the information came from and what security was traded in are different aspects of the equation. However, that does not prevent one from asking whether the information that a person possesses can be used to predict the movement of a security unrelated to the source of that information.
The District Court's Decision
Panuwat moved to dismiss the SEC's complaint, arguing that because he did not trade in Medivation securities, he could not be guilty of insider trading.
The district court disagreed - in denying the motion, it found that the SEC's allegation of misappropriation was sufficient to survive a motion to dismiss, and that the SEC's theory was not "novel" enough to violate the Fifth Amendment's requirement of due process.⁵
Ultimately, the case went to trial; in April 2024, a federal jury found Panuwat guilty of insider trading. The court later ordered that he pay a civil penalty of approximately $321,000 and was subject to an injunction against future violations of the federal securities laws.⁶ Panuwat has since appealed the decision to the Ninth Circuit. It will have to consider the novel issue of whether insider-trading laws apply to trades of a security unrelated to the source of the information.
The Company Policy Problem
One of the issues in Panuwat's appeal is a potentially surprising one: Medivation's insider-trading policy. According to Bloomberg Law , the argument that the Ninth Circuit heard in June 2026 focused heavily on what Medivation's insider-trading policy said and whether it was detailed enough to forbid employees from trading in other companies' securities if they had access to confidential information.⁷
That is an unusual way for a dispute over federal securities law to implicate corporate policy. If a company's policies and rules about what its employees can and cannot do when they possess confidential information are sufficiently detailed, they can create a duty of trust and confidence, just as if the employees were directors of the company.
What critics of the SEC's position object to is that applying insider-trading laws to cover these circumstances creates unpredictable liability for people who do not know how the information they possess might implicate federal securities laws.
According to Panuwat's lawyers, the expansion of insider-trading laws might violate the Fifth Amendment's prohibition on vague laws. However, the SEC has argued that the misappropriation theory of insider trading already provides a legal basis for the government's allegations.
The Ninth Circuit will have to evaluate which side's arguments carries more weight.
The Problem of Line-Drawing
The most challenging issue with applying insider-trading laws to the circumstances of this case is the problem of line-drawing.
It is not difficult to imagine an executive at a pharmaceutical company learning that her company is about to announce a blockbuster drug and using that information to buy the stock of a competing pharmaceutical company. But where does the line get drawn?
Does it apply to suppliers and customers?
Does it apply to companies that operate in the same industry?
Does it apply to a broad market index?
At some point, the connection between the information and the security becomes so tenuous that ordinary investors are unable to analyze the connection between the information and the value of the security. That is the objection that people who oppose the SEC's position on shadow trading levy against it.
Because there are so many ways in which information about one company could implicate the value of another company, an application of insider-trading laws to these circumstances would be an expansion of those laws that would violate the principle of due process.
The Case for Shadow Trading Liability
The strongest argument in favor of the SEC's position is that applying insider-trading laws only to cases in which the insider traded the securities of the company that provided the information would create an obvious loophole.
An executive could learn of an impending acquisition, refrain from trading in the target company's securities, and trade in the securities of a company that would benefit from the news. That would give the trader an advantage over those who did not possess the information and would be using the information to enrich themselves at the expense of others.
Those who support the SEC's position argue that, at that point, it ceases to matter what security the insider trades in - they have violated the duty of trust and confidence by misappropriating the information for their own benefit.
The Case Against
The counterargument is that the uncertainty of the application of insider-trading laws to shadow trading creates an even more difficult issue: unpredictability. Insider trading is already a complicated area of federal law, and adding a new wrinkle could jeopardize the ability of investors to understand how their actions fit into the securities laws.
Companies operate in an interconnected economy - mergers and acquisitions, financings, and other events routinely affect not just the companies involved but also their suppliers, customers, and the industries in which they operate.
It would be impossible to create a list of all the ways in which a piece of information could implicate another security. Because of that fact, Panuwat's attorneys argue that applying insider-trading laws to shadow trading violates the Constitution's prohibition on vague laws.
Why It Matters
The SEC's allegations against Panuwat have created a novel issue in federal securities law. The application of insider-trading laws to trades of other companies' securities raises difficult questions about due process and the unpredictability of the securities markets.
In addition, the case provides yet another illustration of the difficulties of applying insider-trading laws in a modern economy in which the value of one company's securities routinely affects the value of another's . Conclusion Whatever the outcome of the case, it will provide useful guidance on how courts will apply insider-trading laws in the future and the extent to which employers may be able to restrict employees' trading activities. In the end, the issue before the Ninth Circuit is a fundamentally simple one. Does insider-trading law apply to trades of a security unrelated to the source of the information?
Securities & Exchange Commission, SEC v. Matthew Panuwat, No. 21-cv-06322 (N.D. Cal. Aug. 17, 2021), SEC complaint, alleging that Panuwat learned of Pfizer's impending acquisition of Medivation and then purchased Incyte call options.
Securities Exchange Act of 1934 § 10(b), 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5.
SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968) (en banc).
United States v. O'Hagan, 521 U.S. 642, 652–53 (1997).
SEC v. Panuwat, No. 21-cv-06322, 2022 WL 1007173 (N.D. Cal. Apr. 4, 2022).
SEC v. Panuwat, No. 21-cv-06322 (N.D. Cal. Sept. 9, 2024); see also American Bar Association, Shadow Trading in the Spotlight, discussing the 2024 jury verdict and $321,197.40 civil penalty.
Martina Barash, SEC's 'Shadow Trading' Case May Hinge on Company Policy Language, Bloomberg Law (June 11, 2026).
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